Search form

4 debts which may harm your home loan worthiness

Your credit score will be a big factor when you'll apply for a mortgage. The credit score will be considered while calculating your monthly payments, so it may increase or decrease your payment amount. But it’s more important to know about the factors, especially the debts that affect credit scores and ultimately affect your mortgage worthiness.

Mainly we can encounter two categories of debts, one is secured and the other one is unsecured. Secured debts consist of the loan amount and a collateral along with it. For an example, you take out a home loan and build your home, but you’re unable to make the required payments. Then to recover the money, the bank will occupy the house. So, a mortgage debt is a secured debt.

On the other hand, suppose you took out a student loan but unable to pay it back to the bank. This time, you haven't put anything forward, which can be treated as a security. It means that the bank can’t reclaim your education or knowledge and sell it back to recover its money. Thus, a student loan is an unsecured debt.

Let’s have a look at the 4 main debts, which will have a deep impact on your credit score, and eventually will affect your loan affordability, and ultimately your mortgage worthiness:

1. Auto loan debts

Auto loans are treated as secured debts. If the borrower fails to pay off the loan, the lender will take over the car. It’s seen in some instances that due to the auto loan the credit score has been raised to a significant level. The reason is that getting an auto loan is much harder than any conventionally secured loans. The lenders will assume that if you’re already having an auto loan and paying it without any problem, that means you are financially strong and reliable. So, the chances of getting the approval for a mortgage even get higher.

2. Mortgage loan debts

Mortgages are the most important of all secured debts which have a clear collateral, that means the property itself. If you make your monthly payments on time, your credit score may increase. If the lender finds out that you're falling behind on your monthly mortgage payments, he'll surely not entertain your new mortgage application. On the other hand, if you're already maintaining a mortgage and applying for another one, the new mortgage company or lender will verify your capability of paying both the mortgages altogether. So, your monthly income and monthly expenditure must be balanced in such a way that your income should bear a greater ratio than expense. If this reflects in your debt-to-income ratio, then the lender will be convinced to approve your loan application.

If you apply for a second mortgage to invest in a rental home, your income from the rental property will not be considered as an income. Some lenders will consider it as a direct income only after you’ve spent two years as an owner of that home.

3. Student loan debts

Student loans are unsecured debts, and it's not harmful to your credit score if paid periodically. As student loan has a long period of time to pay off, it has enough time to increase the credit score. Taking a student loan debt will affect your mortgage affordability as it'll reflect in your debt-to-income ratio.

4. Payday loan debts

Payday loans are unsecured debts which normally doesn't appear on your credit report. Payday loans are harmful to your credit if you don't pay them off. The interest rates on payday loans are quite high; that's why they cost more than other conventional unsecured loans.

Normally having different types of debts can boost up your credit score easily. But it's also advised not to gather too many debts in your name. Most of the lenders will accept the DTI requirement below 43%. They'll also check whether or not you have the potential to pay off all your debts and the mortgage payments you have applied for, before giving the green signal.